2.3 Aggregate Supply Flashcards
What is aggregate supply?
The total goods and services produced in an economy at a given price level and time period
Why is the Short Run Aggregate Supply curve upward sloping?
In the short run, when firms need to increase production, they need to employ more labour, but as this is only a short term increase in output, they do not need more workers, so they have to get temporary workers or get existing staff to work overtime. This requires an incentive for workers, so they will be paid overtime and therefore increasing costs for firms, and increasing the general price level.
What is the difference between long run and short run?
In the short run, at least one factor of production is fixed but in the long run, all factors of production are variable.
What 3 factors affect SRAS?
Changed in the cost of raw materials and energy
Changes in the exchange rate
Changes in taxation levels
What are supply side shocks?
When firms cost of production is significantly changed due to an external event.
What is one key difference between LRAS and SRAS?
LRAS has variable wage rates and the size of the labour force is variable.
Why is the Classical LRAS curve perfectly vertical?
Classical economists believe that in the long run the output an economy can reach is fixed, because all factors of production will be being fully utilized. But in the short run this can be exceeded by offering overtime etc. This cannot be sustained in the long term, therefore in the long term AS will always go back to the same point. In addition, they believe the market forces and the ‘invisible hand’ will correct markets and therefore causing a fixed level of output.
Why is the Keynesian curve an inverse L?
Keynes believed that an economy wouldn’t always be able to operate at its productive potential therefore in the Keynesian zone, where there is large amounts of spare capacity, increases in output would have no inflationary pressures as factors of production are spare so no one is competing for them, and as output increases the level of spare capacity reduces so firms must outcompete each others for them, therefore introducing inflationary pressures.
What are the 5 factors which make wages ‘sticky downwards’?
Trade unions do not allow wages to fall below a certain level
Workers are not willing to work for underneath a certain level
Minimum wages dont allow it
Firms want to maintain a level of productivity so if wages drop productivity will fall
Some places may have high employment and others may have low due to labour immobility
What are the six factors which affect LRAS?
Demographic changes and migration
Tech advancements
Changes in relative productivity
Competition policy
Changes in government regulation
Changes in education and skills
